Commerzbank AG (CBK) Earnings Call Transcript & Summary

Good afternoon, everybody, and thank you for joining us. Before we get started with the Commerzbank discussion, I'd like to remind you there is a question box at the bottom of your screen. We'll have time for Q&A towards the end of the session. So if you do have questions, feel free to send them in, in the question box at the bottom of the screen. So I'm very, very pleased to welcome this afternoon, Bettina Orlopp, CFO of Commerzbank. Good afternoon, Bettina. Thank you very much for joining us.

Good afternoon, Rohith.

Perhaps we could just start with an update on the operating environment in terms of how that's evolved in recent months in terms of customer behavior, competition and asset quality.

Yes. Yes. Well, I mean, it had been some tough months, if you look on the economy, specifically, the quarter where we had the lockdown in Germany, we saw a minus 10% decline in GDP, and that is something which we also have seen across the globe to say it like that. Now after the easing of the requirements, et cetera, we at least have seen some recovery. Economic forecast is still negative for this year. For Germany, our own economists said end of last quarter, minus 5.5%. They now have improved it a little bit by 1% to 4.5%. But still this year is difficult. However, we also see that -- I mean, revenues are up pretty stable, very mixed, dependent on which revenue costs and client segments you look at. And with respect to competition, I would say, not a big change. With respect to customer behavior, a big change because we really see -- on the private client side, we see an acceleration of the customer behavior really directing towards digital channels, which is good and important. And on the corporate client side, we definitely have seen lots of activity end of March and April with respect to credit lines drawn and stuff like that. And basically, we saw really the highest activity in the first half of the second quarter and now it's coming down again. And clearly, very mixed picture on what you look at. There are some parts, very active -- lots of activity, for example, on the DCM side and other things, which have been, I would say, rather calm like trade finance.

And one of the features of the sector that has reemerged in recent weeks has been M&A that sort of very much come back into focus. Could you talk through your key considerations when you think about M&A and whether the regulators' perspective on the use of bad will changes any of those at all?

It has definitely changed a little bit the view on how you look on M&A, clearly, but I mean, if I look on that short term, I mean, I don't see real cross-border M&A emerging. A lot -- I think we still need to -- things evolving on the European Banking Union before we really see cross-border M&A that makes sense. Domestic consolidation always has a lot of value in it, and we now see the recent cases in Spain and Italy that it makes a lot of sense. Now speaking about Germany, we should not forget we have a 3-pillar system and consolidation across the pillars, I think, is still something which is, I would say, a rather long-term perspective. And besides that, I think we -- the best thing we currently can do is really concentrate on our stand-alone strategy, on our transformation and then we take it from there.

And in terms of the strategy, I guess, looking very far forward is difficult at the moment. But I was wondering if there's any update that you can give on the CEO search process?

Well, I'm in the lucky situation that we are in the two-chair Board. So I'm the management -- part of the Management Board and the search of the CEO is clearly the task of the Supervisory Board, and there of our new Chairman of the Supervisory Board, Hans-Jorg Vetter, who joined Commerzbank beginning of August. And he has clearly started the process and I think everybody who's involved in this process knows that we really need to speed it up because we need to have decisions to be taken. But at the very end, it has to be a process, which is done diligently, and I think he's doing that.

So then if we -- I guess, if we move on to some of the operational issues. Obviously, the first half of the year, asset quality is very much in focus. And I think that is still the case.

Yes.

Your coverage is lower than many European peers. What are the characteristics of the portfolio or different parts of the book that give you the confidence in those lower than average coverage levels? I mean is it geography? Is it mix? What -- or sectoral exposures? What is it that gives you confidence in the coverage?

I think it's all of what you have just said. I mean starting with the point that if you look on our NPE ratio, end of June, it was at 0.8%. That is a very low value, that's number one, and it shows the health of our portfolio. Secondly, I mean, we are in Germany. Germany, I think, has some very convincing programs -- support programs from the States, that's the KfW loans, but it's also the so-called Kurzarbeit thing, which really supports companies to basically send the employee basically home, but -- and therefore, have a P&L relief and a lot of things which are really supporting the situation. And then we have a very well-diversified portfolio, which clearly now also helps. And to be very honest, I mean, this is also something which you see everywhere. There is not yet a lot really showing our seed in the portfolio. And I think we all expect more to come over the next couple of months, and we have to prepare for that. And that's what we have done. We have done a thorough review of our portfolio, and on this basis, combined with the economic forecast, and there we took the more, I would say, conservative forecast of CCB for Germany and for Europe. We did a review of the portfolio and basically calculated the TLA, which we have booked now for Q2. And I assume that we will follow a very similar approach for Q3. And then Q4 is more likely that we probably will see more emerging because then also a number of programs will end, and then you will really see how resilient and how sustainable the recovery of the economy is.

And the guidance for the full year implies a charge in the second half that is similar to the first half, if you exclude the specific case that you had to raise a provision for. What's driving the thinking behind that? And what was the sensitivity to a worse economic outcome than you're anticipating?

Yes. Well currently, we assume clearly kind of V or U-shaped scenario. So no second lockdown, at least not something which is a nationwide lockdown; a real recovery of the market, so really following also the forecast of the economists who see a recovery in 2021. And that's what we currently assume, and that is also embedded in the guidance of the EUR 1.3 billion to EUR 1.5 billion LLP. And it's based really on a review of the portfolio. So it's just not something where we have done kind of a broad -- very rough assumption, but rather a real review of the portfolio looking into single targets.

If we then move on to costs, where performance actually in the first half was very good, down 4% if you -- on an underlying basis, excluding the compulsory contributions. To what degree can that be sustained? You've improved the guidance for the full year. So how much of that cost reduction that you're seeing is sustainable in the first half and the second half of the year? How much is just because you're spending less because of less travel, entertainment, et cetera? And what do you expect in terms of branch closures and restructuring charges for the year?

Yes. So I think it's all sustainable because our assumption also will be then that you will have this trend continued in the next year in 2021. Part of it's stemming from basically reduction in staff because we still had also some reduction programs ongoing coming just from our old strategic program, Commerzbank 4.0, which lasted until 2020. Then there are clearly also -- there is an impact on changing behavior of the suspected travel, the suspected events, marketing, which clearly comes from corona, but we are also convinced that you will see some of these effects, which will continue because I think we will not return to our old travel procedures and stuff like that, training will be different and things like that because the Board has now really changed its behavior. And then we are indeed already in the course of at least partly implementing first measures of Commerzbank 5.0, which we can do because there are no regret moves also with respect to the new strategy, and that includes that we have basically concluded an age part-time retirement program, a voluntary program, and we signed agreements with less than 1,000 colleagues, which will now leave within the next 2 to 3 years, the bank, that's one part. The other part is that we are in negotiations currently about the closure -- or I would rather say, the nonreopening of 200 branches, which you then will also see already the first effects coming in 2021. And for that, we will most likely also book restructuring charges for the closure of the branches, but also with the related headcount reductions either in Q3 or Q4. And I said that in the guidance for -- during Q2, that it will be roughly EUR 200 million, which we, for sure, will book either in Q3 or Q4, depends a little bit on the pace and the progress of negotiations.

And you've talked in the past about work underway to identify additional cost savings on top of what you've already discussed. And can you talk about where you see those savings? I mean you just talked about the branch network. Are there other sort of physical infrastructure, headcount, technology savings that you think you can make?

Yes. It's -- to be very honest it’s all over the place. It's basically that we do not leave out a single product service region. We really review or have reviewed over the past months every -- yes, single location and every area opposite the bank. And whenever we communicate the program, it's -- it will be very extensive, and it doesn't leave out one single area.

So then moving forward to income. Interest rates continue to be a significant headwind. What can be done in terms of deposit repricing or competitive positioning to help offset those rates-driven headwinds? And then I guess, also on net interest income, how significant a benefit is TLTRO III?

Yes. Let me start with the TLTRO. So the TLTRO, we -- it's acknowledged that we participated with EUR 32 billion. So it's easy to calculate. The benefit out of it is 50 basis points times the EUR 32 billion, means EUR 160 million. I think it's more the question when we book it. We book it partly this year or fully next year to be open. It's still open because there are some technical details to be clarified. But that will also not move the needle. So the more important thing is really how overall revenues are developing and there we definitely have a mixed picture. With respect to the deposit facility fee, I mean it's a very established procedure, which we already follow-up since several years now for the corporate client side. And we have it basically introduced there across our clients, and we get roughly EUR 100 million out of this deposit facility fee on the corporate client side. On the private client side, we have first tested it end of last year, beginning of this year with the most wealthy clients, which have had liquidity of more than EUR 1 million parked with us. And then we basically did a rollout where we went down to clients who have liquidity with us more than EUR 250,000 on the account. And we have actually stopped the rollout when the lockdown started because we thought that this is probably not the subject clients want to talk about during lockdown. And we've restarted the whole thing mid-May. I think the complicated thing on it is that we really have to have bilateral agreement with each and every single client. Reactions are, as expected, some sign it, pay the fee, others are basically transferring the money into securities, which I think is anyhow a good thing to do. And then thirdly, some are also withdrawing it and putting it to -- or bringing it to other banks. And so you will probably not see a bigger effect this year, so it will be a lower double digit million number. We expect more for the years to come, so from 2021 onwards. It's also important that we have basically changed it now with new clients. So whenever we onboard a new client, we do not need to have these bilateral agreements because it's basically in the customer onboarding procedure, it's part of it, which makes it easier for all new clients, but for the existing clients, we have to find agreements.

And I guess the other piece from a revenue perspective is really volumes. And you talked a little bit earlier about some improvement recently. Where are you seeing demand, which parts of the book? And how do you think that progresses over the coming quarters? And also, what are the key uncertainties?

Well, the biggest uncertainty is probably the development of the economy and how fast we see the recovery. But I mean, it's -- I really have to differentiate between private clients and corporate clients. On the private client side, mortgage business, for example, has been pretty stable, surprisingly stable, and we still see very good business there. Consumer loans have been down, and we expect also that the recovery will last because consumption has been reduced as also retail industry, et cetera, knows. And where we basically have seen very good revenues and a very nice development is on the brokerage side, and that's basically on the private client side. On the corporate client side, as I've said, we have seen quite an activity at the start of the crisis. Lots of drawn lines, lots of activity and real increase in our credit volumes, loan volumes that has now, I would say, calm down and we also have the feeling that this will also stay like that for the time being because specifically also the larger clients have used also the market to get additional liquidity and therefore, we do not expect an increase in activity there. What you also see is that trade finance is still -- I mean, it's starting to recover, but not a lot. But expectation is clearly that dependent on the development of the economy, you will also see a pick up of activity in trade finance over the coming weeks and months.

And then thinking back to Q2, where income was supported by capital markets activity, strong commission income, commerce ventures and some fair value movements. How much of that Q2 income do you see as sustainable?

Well, all income, which is related to customer revenues, et cetera, is pretty sustainable, with the exception I just said that in some ways activity has increased, in some ways activity has decreased. But I would say, also, customer acquisition is working -- is functioning on the private client side. DCM has been extremely strong in the second quarter. There, I would say there's a question mark whether they can really repeat what they have shown in the second quarter. And with respect to CommerzVentures, I mean they have a very good portfolio, but we all know that sometimes portfolio is developing nicely, but there might be also some companies who are not developing as expected. So I would say that we definitely expect more to come from CommerzVentures, but probably not every quarter.

So moving on to capital and 13.4% CET1 in Q2 is a very healthy position. Can you help us think about how that evolves in the second half of the year in terms of drivers like profitability, perhaps ratings migration, regulatory changes, et cetera?

Yes. I mean we stick to our guidance that we said we want to have where we want to see a capital ratio of above 12.5%. That is a 90 basis point buffer that's quite a lot, and that is something which is a buffer for growth, but it's also a buffer for potential rating migration, which we expect, definitely, but we don't know when, but we expect it to see at least to some extent until year-end and probably even in 2021. And we also now see that, I mean, regulatory initiatives are picking up again. So the TRIM levels will come either in the third quarter or in the fourth quarter, so we take that all in account -- take that into account, but we feel pretty comfortable with our cost-income ratio -- I'm saying with the capital ratio. With the cost-income ratio, we feel not so comfortable, we need to improve it. But on the capital ratio, we really feel comfortable, and we also believe that we can basically also work with both things. On the one side, the restructuring costs, which we definitely will book at a certain point in time whenever we have an agreed and decided strategy. And on the other side, we also prepared to take or to absorb potential additional RWA inflation because of breaking iterations. The good thing is our capital ratio is at 13.4%, and we have also lowered our MDA now down to 9.8%, given our most recent AT1 issuances.

So on that, I mean, 12.5% for this year. You just mentioned the lower MDA. Is 12% to 13% still the right medium to longer-term targets?

I think for the time being, there is no necessity to change that. I think it's always good to have a buffer specifically because you sometimes meet the buffer if a crisis is emerging, or if you have things like the things which we have in front of us, a big restructuring program, which we need to book. And therefore, it's always important to have enough flexibility to do so. And it's basically our view on that.